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January 21, 2013

China to Push Growth at Home and Abroad

China spent a good part of 2012 battling an economic slowdown and accusations of political corruption, as well as preparing for the handover of power that comes once every ten years. But toward the end of the year, and after seven straight quarters of slowing, the Chinese economy once again began to heat up. A boost in its factory purchasing managers’ index (PMI), more consumer action, and an increase in the services sector teamed up to bring optimism in their wake.

Whether the upswing is a trend or not, in his final New Year’s Eve speech as president of China, Hu Jintao—who will hand over the reins to his successor Xi Jinping in March—said the country would work to boost economic growth globally in the year to come. He gave no specifics on just howChinawould do that, but said it would “step up efforts to promote strong, sustainable and balanced growth in the world economy.” He also said the country would work on keeping growth in 2013 stable while also restructuring its growth model, and that its long-term goal for both Macau and Hong Kong was continued prosperity.

One way its growth model could change is through its increase in domestic consumer spending. The appetite of Chinese customers for everything from luxuries and cars to furniture and appliances fueled the fourth-quarter recovery ofChina’s economy, with manufacturing, real estate and mining contributing a smaller share; the latter three have suffered during those seven quarters of slower growth but may be clawing their way back. Retail sales were up 14.9% YOY in November. Retailers’ morale is up, too, with 72%, according to the China Beige Book survey, expecting higher sales in six months.

China’s service sector has shown the fastest growth in four months for December. In 2011 services provided some 36% of new jobs in the country, for the first time outpacing agriculture as a driver of employment. Services are also on the upswing because of the population shift from rural areas to cities, with urbanites relying more heavily on the sector.

Xia Nong, deputy director-general of the Department of Industry under the National Development and Reform Commission, was quoted in China Daily saying, “Expanding domestic demand will be a major stimulus for China's economic growth, and the greatest potential will come from the service sector.” He also said that he would encourage not just expansion of Chinese service firms internationally, but also woo foreign competition to operate in China. Outside investors are already taking advantage of the boom in services; the China Daily cited Ministry of Commerce figures of $47.57 billion invested in the sector by foreign firms in the first 11 months of 2012 alone.

Construction services were among those driving the increase, and that falls in with rising land prices. Signs point to a real estate recovery; that could drive ripple-effect recoveries in some 40 other industries that depend on the health of the real estate market for their own well-being. Still, the government has said it isn’t ready to let up on tight credit and purchasing restrictions that were designed to cool down a market once thought too hot for its own good.

VIP gamblers had drastically cut their losses in Macau, the only place inChinawhere casino gambling is legal, during 2012. That hurt; VIP spending brings in some 70% of the region’s total revenues. In 2011 total income from gambling was up 42.2%; 2012 saw that figure dive to 13.5%—still respectable, but anemic compared with 2011’s numbers. However, during the holidays spending picked up; December came in at 19.6%. That augurs well both for 2013 and also for a new MGM casino that was approved forMacauby the Chinese government in January—even though the new casino won’t open on the Cotai Strip till 2016.

While there are still challenges ahead forMacau, with existing casinos functioning at full capacity already and a new nonsmoking regulation taking effect, additional spending from a growing Chinese middle class may help to push the numbers higher than in 2012. There is also a drive to add additional tourist services to reduce the region’s dependence on gambling for income and bring in more diverse revenues.

Of course,China’s slowdown has come in large part because of economic woes not its own—hence its desire to drive economic recovery globally. Even that may be looking up, though; China’s National Bureau of Statistics and the China Federation of Logistics and Purchasing announced at the end of the year that the country’s manufacturers had seen a third straight month of growth, with a PMI for December of 50.6. And tighter regulation to restore confidence, both domestically and abroad, in its financial sector is already being imposed on the country’s IPO market.

A recent report from Cerulli Associates pointed out that “the China Securities Regulatory Commission (CSRC) is increasingly outward looking and has begun hiring staff from global financial institutions.” The report also stated, “The regulator has also recently begun seeking the views of global asset managers when it drafts new regulations. This indicates the CSRC is preparing to engage with the world beyond Hong Kong andTaiwan, which is also whatChina’s fund houses are attempting to do.” It postulated that within three to five years, those fund houses will have the track records necessary to win inflows from European Union and North American markets.

WithChinaevidently preparing to woo international investment money, it remains to be seen whether it will favor domestic investors over foreign or strive to see them both treated equally. Ken Yap, head of Asia-Pacific research at Cerulli, said, “It's probably too early to tell, but we do not expect major shift in the government's policy on foreign investment. I thinkChinawill continue to become more accessible to foreign funds on a controlled and gradual basis.”

Asked whether the new regime might move more quickly than the current three-to-five-year timeline Cerulli estimates in attracting international business,Yapsaid, “Not really. The Chinese mutual fund industry started about 12 years ago, and has grown rapidly to become one of the largest markets inAsia. Overall regulations have changed progressively to accommodate sustained growth. We expect more of the same under the new regime.”